Effective Demand
Introduction Demand is the quantity that consumers are able and willing to purchase at each conceivable price. Strictly speaking this definition describes effective demand, as opposed to latent demand when a customer/consumer is unable to satisfy their demand, whether it is due to lack of information about the availability of a product or due to lack of money.Or Effective demand is the "ability" to pay for goods and services. Demand Schedule Table 1 can be plotted on a graph. Traditionally the vertical axis is used for price while the horizontal axis is used to represent quantity. By joining up the plotted scatter graph points one can interpolate the demand curve given by the data in Table 1. Diagram 1 depicts this. It is very important to remember that the data which the graph is drawn from assumes that all other factors, like taste and time, remain exactly constant and that only price is calibrated. In the real world however one cannot assume these other factors to be constant because homo sapiens are not homo economicus’. Thus the demand curve shown is a very crude generalization of real human behavior and must not be interpreted as being fact. Using diagram 1 one can visually demonstrate revenue. For example at price of 3 quantity of 2 melons is sold. Thus total of 6 (3 * 2) revenue is generated. This is shown in Diagram 2. Factors Affecting Demand As demand is based on human made choices many factors can affect demand. One may categorize these factors into 2 sets. One set affects the position of the demand curve as a whole while the other set of factors affect the gradient, also known as the Price Elasticity of Demand, or PED for short. Factors affecting Demand Factors affecting the position of the demand curve affect the overall position of the demand curve on the price against quantity graph. Thus changing one or more of these factors will result in the shift of the demand curve to the left or right. The main factors affecting the position of the demand curve are as follows: *'Taste'. This can change because of fashion, custom or preferences. For example the rise in popularity of video games has stimulated the rise in demand for games consoles and high end performance PCs. This is demonstrated in diagram 3. *'Related goods'. This is further broken down into substitute goods and complementary goods. **The change in demand, and therefore price, of substitute goods will usually have the opposite affect on the demand of a good. For example the low price of Chinese microwaves has reduced demand for microwaves made in the West. **'Complementary goods' demand change induces in the exact opposite effect compared to substitute goods’ demand change. If the price of complementary good drops then the demand for a good, which the complementary good complements, will rise, that is shift to the left. For example a significant fall in oil prices may result in rise in petrol driven vehicles. *'Income'. The more money the consumer has to spend the more likely the consumer is to spend that money. Many factors affect disposable income. For example, interest rates or job opportunities. It is important to understand that some very cheap goods, like chewing gum for example, are not affected by changes in income by a great deal while other goods, like houses, are. Factors Affecting PED *'Time. time also plays very important role to change the demand , for example , during the time , the people in the country will need the goods, so the demand has increased even the price of that commodity is increased.' *'Expectation of the consumers; when the consumer expects the price of the commodity to rise in the future, they rush to go to the markets to buy the commodity at the current price, and as a result the demand in the market will be increased.' *'Breadth of definition.' *'Neccessity level.' See also *Supply *Equilibrium *Price Elasticity of Demand *Market References *David Begg, Economics 7th edition, 2003 (ISBN 0-07-709947-8) *Susan Grant, Chris Vidler, Economics in Context, 2000 (ISBN 0-435-33111-6) External Link *tutor2u.net article on demand *economists magazine's definition of demand